Lean Mro Productivity

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Lean opportunities in MRO Procurement:

Improved productivity and reduced waste

In an increasingly competitive global environment, organizations must innovate to find

opportunities to improve their productivity and reduce total cost. Initiatives that

consider ALL aspects of process improvement and waste reduction will find thegreatest level of success in improving efficiency.

What is productivity?Productivity is output, efficiency, and production. In economic terms, it is the rate at which a

company produces goods or services in relation to a needed amount of materials and

employees. Productivity can be defined in two ways:

1) Total labor productivityis simply output divided by the number of workers, or by thenumber of hours worked. Output can be anything from number of packages to airlinemiles flown, but more generally it is some very broad aggregate like gross domestic

product. Measures of labor productivity capture the contribution to output of other inputsthan hours worked.

2) Total factor productivity, by contrast, captures the contribution to output of everythingexcept labor and capital. Innovation, managerial skill, organization, waste minimization

(all forms) and even luck can contribute.1

The two productivity concepts are related. Increases intotal labor productivity,the amount

of output created (in terms of goods produced or services rendered) per unit input used, canreflect the fact that each worker is better equipped with capital. Alternatively, gains intotalfactor productivity, or any effects in total output not caused by inputs or productivity, are

frequently obtained through the use of innovative process improvements or organizationalchange.

What is waste?Wastecan be identified many ways and as many things, but ultimately it is any activity that

requires allocated resources but adds no value from the customers perspective. Some

activities, while not directly adding value to a product or process such as time spent onequipment maintenance or the accounting function are necessary in the production of goods

or services and must be perpetuated. Other types of non-value-added activities, like

maintaining underutilized inventories or the time wasted searching for tools, must be

reviewed and constantly re-evaluated, and if identified as waste, the appropriate steps must

be taken to eliminate them.

Many initiatives and systematic approaches for improving efficiency have been adopted bymanufacturing organizations to help improve their products and processes by focusing on

quality, improving productivity and reducing all types of waste.


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Productivity improvement methodologiesThe Toyota Production System, developed in Japan in the 1940s, is the framework and

philosophy organizing the manufacturing facilities at Toyota and the interaction of thesefacilities with their suppliers and customers. The philosophy was largely developed and

popularized by Toyota engineer Taiichi Ohno. The main goal of TPS (commonly referred to

these days as lean methodologies) is to eliminate all forms of waste within manufacturingoperations, but has become a very popular tool for improving efficiencies in ALL types of

organizations.

Another improvement method called Total Quality Management(TQM)is a management

approach for an organization. TQM is centered on quality, based on the participation of all

organizational members and aimed at long-term success through customer satisfaction and

system-wide benefits. Popular in the U.S. during the 1980s, it was developed by W. EdwardsDeming and is largely based on the quality revolution started in Japan in the 1940s.

Six Sigma was pioneered by Bill Smith at Motorola, and popularized in manufacturingenvironments by General Electrics former CEO, Jack Welch. It emphasizes the use of

mathematical and statistical tools to manage process variations that can cause defects, and

systematically works toward managing the ultimate goal of consistent and measurablequality.

These approaches to improve productivity and minimize waste are being used by many

organizations to improve their products and processes. Based on the results of the 2006IndustryWeek/MPI Census of Manufacturers, the implementation of lean methodologies

have significantly increased in popularity. In 2006, 40.5 percent of all manufacturers

surveyed have adopted lean as their primary improvement method, a jump of nearly 5percent from the 35.7 percent reported in 2005.

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Lean Initiatives for reducing wasteLean methodologies based on the Toyota Production System are management philosophies

that focus on the reduction of the seven deadly wastes:

Overproduction

Waiting time

Transportation

Processing

Inventory

Motion

Scrap in manufactured products or any type of business

By eliminating waste (roughly translated in Japanese as muda), quality is improved,production time is reduced and cost is reduced. Lean tools (more than three dozen, andgrowing) include constant process analysis and continuous improvement (kaizen), pull

production (by means of kanban) and mistake-proofing (poka-yoke). Lean, as a management

philosophy, is also very focused on creating a better workplace through the Toyota principleof respect for humanity.


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While some believe that lean methodologies are a set of problem-solving tools, most experts

now agree that it is a holistic, comprehensive, enterprise-wide program designed to be

integrated into the organizations core strategy.

Key lean principles also include:

Continuous improvement:Efforts to reduce costs, improve quality, increase productivity

and share information. Flexibility:Efforts to produce different mixes or greater diversity of products quickly,

without sacrificing efficiency at lower volumes of production.

Supply chain enhancement:Building and maintaining a long-term, strategic relationshipwith suppliers through collaborative risk-sharing, cost-sharing and information-sharing

arrangements.

Lean basically gets the right things to the right place at the right time in the right

quantity while minimizing waste and being flexible and open to change.3

Lean implications for MRO/indirect materials procurement and inventoryIndirect procurement activities concern operating resources that a company purchases to

enable its operations. It comprises a wide variety of goods and services, from standardizedlow-value items like office supplies and products used in facilities maintenance, repair and

operations (MRO), to complex and costly goods and services like heavy equipment and

consulting services.

Purchasing organizations in many industries sometimes assume incorrectly that just-in-

case stores of indirect goods, specifically those used in the maintenance and repair of plants

and facilities, are less costly than the cost of downtime or lost production. The perceived painof not having what may or may not be needed in an emergency or downtime situation often

creates inventories of things that are never used or become obsolete or damaged. In lean

terms, these underutilized or obsolete inventories, and the associated procurement activities(those not directly related to production), are considered waste, or muda. The time and

resources involved with information administration and gathering, supplier contacts,

background reviews, negotiations, and fulfillment activities of indirect materials create waste

and reduce overall production activity in often intangible but very real terms.

Many organizations have strategic sourcing initiatives in place, but they do not extend to the

indirect purchasing categories, specifically MRO. Literally hundreds of thousands ofproducts can be considered MRO in categories such as lighting or safety products. Of this

category of products, buyers consider about 40 percentof requirements are for spot buys orunplanned purchases.


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What is an unplanned purchase?Unplanned purchases refer to the type of buying occasion associated with maintenance,repair and operations (MRO) products that are bought infrequently and needed on an

unpredictable basis and not typically purchased year after year. The purchase is unplanned

not because someone isnt a good buyer or maintenance professional. While frequentlyconsidered emergency downtime situations, these occasions are unplanned truly because of

the way the item behaves in a facility. An example would be an elevators up and down

button. Neither purchasing nor maintenance plans for the button to go out; and when it does,purchasing typically needs to place an order for the item if it is not found on a storeroom

shelf.4

Supplier consolidation lowers costs and improves productivityThe trend in the facilities maintenance business is moving toward organizations trying to

reduce the number of suppliers and lower the cost of procuring tools, safety equipment,lighting and other maintenance products used to keep their businesses running. What is

actually required in these situations are lean supply channels that:

1)possess more of a thorough understanding of customer needs; and,2) are able to provide needed goods at the appropriate place and time as determined bydemand (pulled).

This methodology would solve two problems the reduction of the costs (waste)associatedwith holding rarely used items in inventories, and allowing organizations to focus on their

core competencies and production efforts, not spending time (waste) sourcing andprocuring

infrequently used MRO requirements.

For planned purchases, a typical company will use 5 to 10 suppliers from whom they

purchase a few high-volume commodity items. For unplanned purchases, a typical companywill have more than 20 suppliers to buy thousands of different products every year.Managing those relationships and adjusting to different suppliers take time and affect

productivity. Managing as few relationships as possible for making unplanned purchases will

minimize procurement complexity and its associated costs.

In some cases, MRO suppliers even offer discount structures tied specifically to the indirect

spend for buyers who use a consolidated approach for MRO purchases.


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Consolidation to one source simplifies the process, saves valuable time, and reduces costs for

product search and availability, resulting in increased productivity.

Consider a broad-line national MRO distributor.Many broad-line national distributors maintain inventories of literally hundreds of thousands

of MRO items. They use extensive networks of distribution centers and local branch officesto ensure prompt and reliable deliveries to their customers. To ensure their success, they havedeveloped strong relationships with thousands of manufacturers of the items needed to

maintain, repair, and operate all types of facilities. This integrated approach ultimately saves

customers time and money. The scale advantages provided by broad product lines, extensivecustomer coverage and logistics network of branches/distribution centers position them as the

perfect solution for unplanned occasion purchases.

In addition, a few have electronic business (e-business) technology expertise that can provide

customers with procurement integration solutions to handle and streamline the indirect

product purchasing processes. Look for a distributor that offers a range of e-solutions that

will grow with your future needs, whether youre integrating a sophisticated e-procurementsystem or streamlining your ordering process from electronic data interchange (EDI) and

marketplace platforms, to online order management tools. These types of systems will

provide some real, easy-to-take cost benefits, like less inventory, better cash flow and lowerlabor costs.

If available, utilize the consulting services teams that are available at some of thesedistributors. They have significant experience with MRO procurement practices, and will be

happy to share their insights with you. They use that knowledge to create a powerful set of

diagnostic, analytical and reporting tools that can give customers a major advantage inidentifying cost inefficiencies and correcting them. They are applied by experienced people

who work closely with customers to ensure smooth transitions, and complete integration for

maximum results.

Choose a broad-line national distributor who is positioned to consistently supplythe right

product, to the right place, at the right time.Identify one whose integrated solutions will

help improve efficiency, maximize productivity and reduce total cost - by helping tominimize your inventory investments, the time and effort required procuring them. As with

any LEAN initiative, focusing on reducing waste in your MRO procurement practices will be

beneficial and tangible for your organization.


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Log on to www.grainger.com, or call or visit your local Grainger branch office, for more

information about how a consolidated approach to MRO purchases can benefit yourorganization.

Sources of Information

1. Sylvia Nasar The Concise Encyclopedia of Economics 1993, 2002David R. Henderson - http://www.econlib.org/library/Enc/Productivity.html

2. IndustryWeek/Manufacturing Performance Institute Census of ManufacturersOctober 1, 2006 - http://www.industryweek.com

3. James Womack & Daniel Jones, Lean Thinking 1996 Simon & SchusterPrinciples of LEAN 1997-2006 by the Lean Enterprise Institute

http://www.lean.org/WhatsLean/Principles.cfm

4. The Power of Planning the Unplanned - Solutions from Grainger W.W. Grainger 2006

The Center for Industrial Research and Service (CIRAS)

2005, Iowa State University of Science and Technology.

http://www.ciras.iastate.edu/library/toc/distributionsupplychain.asp

Wikipedia September 2006 2000, 2001, 2002 Free Software Foundation, Inc.http://en.wikipedia.org

Optimizing MRO Inventory Management

Bryan Ashenbaum CAPS Research -Critical Issues Report, August 2005

http://www.capsresearch.org/publications/pdfs-protected/cir082005.pdf

Lean Mro Productivity

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